Knock-for-knock indemnities Risk allocation in offshore oil
References: Lewis v Great Western Railway Co (1877) 3 QBD 195
Conversely, ‘wilful misconduct’ has been given effect by the English courts. In summary, it arises where a person deliberately or recklessly carries out a wrongful act, or wrongfully omits to do something, either knowing that it will cause harm or where they are reckless as to whether harm will occur. Whether an act has been deliberate or reckless and the standard to which the parties are to be held is unclear and will depend on the context. Is the relevant threshold any wilful misconduct? Or just certain types of misconduct? Therefore, as with ‘gross negligence’, defining ‘wilful misconduct’ in the contract provides certainty by enabling the parties to specify the threshold at which the knock-for-knock clause will no longer apply. Consequential loss in the context of knock-for-knock clauses It is common in the offshore energy industry for the knock-for-knock regime to cover ‘consequential loss’, where each party indemnifies and holds harmless the other party from its own consequential losses. Sometimes, the term ‘consequential loss’ is left undefined. On other occasions, the types of loss that fall within ‘consequential loss’ are extensively listed. Both approaches leave scope for dispute and, therefore, uncertainty. Which approach is preferable will depend on the circumstances. The term ‘consequential loss’ will not be interpreted in isolation but will be construed in the context of the entire contractual liability regime. Traditionally, the interpretation of ‘consequential loss’ was limited to excluding indirect loss. However, recent cases have placed emphasis on the proper construction of the provision in question, meaning that ‘consequential loss’ may include both types of loss referred to in Hadley v Baxendale . Drafting considerations When drafting knock-for-knock clauses the following points should be considered: • how far do the indemnities in the knock-for-knock clause extend? Should they be limited to the contracting parties themselves or should their subcontractors, affiliates, directors and employees also have the benefit of them? • should the indemnities cover claims for loss suffered by third parties? • what types of loss are covered by the knock-for-knock regime? Should it be limited to death/personal injury and damage to property? Should it also include losses resulting from environmental harm? What about loss of profit, loss of use or ‘spread costs’ (the latter was the focus of the Transocean case)? If the types of loss covered by the clause are listed, consider how the ejusdem generis rule will operate • do the parties intend to limit the application of the knock-for-knock regime in circumstances where the loss results from one party’s negligence? If so, this must be expressly stated. Where this is the intention, do the parties wish the threshold to be common law simple negligence? Or do they wish to impose a higher contractual threshold such as ‘gross negligence’? If so, how should that term be defined? • should an additional limitation to the application of the knock-for-knock regime be imposed in circumstances where the loss results from one party’s wilful misconduct? If so, should ‘wilful misconduct’ be defined to tailor it to the parties’ specific requirements? • will the clause be acceptable to the parties’ insurers? • how should claims be regulated? Do the indemnifying parties have any rights to assume the conduct of any claims? If so, on what terms? • as with all indemnities the parties should also consider the following questions: Should the indemnified party achieve 100% recovery? Is the indemnified party under an obligation to mitigate its losses? Should the rules on remoteness of damage apply or should the indemnified party be able to recover ‘unforeseeable’ losses? Express drafting should be included to cater for these situations in a way that reflects the parties’ intentions The purpose of the knock-for-knock regime must always be remembered: To provide certainty by minimising the scope for dispute and lengthy adversarial proceedings concerning fault and liability.
References: Star Polaris LLC v HHIC-PHIL INC  EWHC 2941 (Comm) Hadley v Baxendale [1843-60] All ER Rep 461 2 Entertain Video Ltd & Ors v Sony DADC Europe Ltd  EWHC 972 (TCC),  1 All ER 527
References: Transocean Drilling UK Ltd v Providence Resources plc  EWCA Civ 372
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